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Manhattan Condo Deals Targeted for Online Investors by New REIT

(Bloomberg) --A new real estate investment trust opened shop this week, seeking to raise $50 million from investors online. It plans to use the money on some of the most sought after properties in the world: New York apartments.

NY Residential REIT is a “blind pool,” meaning it owns no assets and is courting investors on the strength of its management team to purchase properties once it has funds. It’s springing to life partly from Manhattan’s growing supply of costly apartments, and partly from a Securities and Exchange Commission rule making it easier for small companies to access capital.

The REIT -- whose advisers include Ryan Serhant, a real estate broker who stars on Bravo’s “Million Dollar Listing New York” -- plans to seek out Manhattan residential properties that can be rented out for income, according to a May 1 filing with the SEC. Acquisition targets would include small multifamily properties, single-family homes, condominiums and assets “available from sellers who are distressed or face time-sensitive deadlines,” according to the filing.

“There were a number of developments built three to four years ago that are just coming to market, and there are going to be developers looking to unload assets at prices we may find attractive,” said Jesse Stein, chief executive officer of Commencement Capital LLC, the company created to manage and operate NY Residential REIT.

JOBS Act

The REIT’s relatively quick founding is made possible by the 2012 Jumpstart Our Business Startups Act, or JOBS Act, which loosened rules for budding businesses to advertise and solicit funds from a wider range of investors. In 2015, the SEC offered some added liberation, allowing startups to raise as much as $50 million in a 12-month period. NY Residential REIT joins a growing list of companies, including Fundrise LLC and Realty Mogul Co., that have used those rules to target individual real estate investors.

“Manhattan is one of the most sought after real estate markets in the world, but 99 percent of people can’t really participate,” said Stein, who previously founded real estate technology company ETRE Financial. “Unless you’re a multimillionaire or unless you’re an institution, you probably don’t have the means to buy property for investment.”

NY Residential REIT may refurbish and sell some real estate. It may also buy properties in exchange for equity in the REIT, allowing sellers to defer capital-gains taxes on the transactions, which may be appealing to longtime owners of New York real estate, said Jonathan Morris, the REIT’s president.

The median price of Manhattan condos and co-ops in the first quarter was $1.1 million, a 3.3 percent decline from a year ago, as new-development properties accounted for a smaller share of all sales, according to a report by appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate. The number of completed deals climbed less than 1 percent to 2,892, while inventory jumped 6.6 percent to 5,867 listings on the market at the end of March.

May List

NY Residential REIT, which is planning to sell 5 million shares at $10 each, is governed by SEC rules and review, and might eventually apply to list shares on the New York Stock Exchange or Nasdaq, according to its filing. Commencement Capital, the external management firm that will run the day-to-day operations of the REIT, will collect fees of 1 percent of the purchase price for each property it acquires, and 0.125 percent of the market value of its common shares quarterly, according to SEC filings. The management firm also will get an “exit fee” of 2 percent of the REIT’s total capitalization should the company merge or be sold.

“That structure is very tough in the U.S. REIT space, because most U.S. REITs are internally managed,” said Dirk Aulabaugh, managing director at Green Street Advisors LLC, who consults for public and private real estate firms and isn’t involved in NY Residential REIT. “A lot of time fees are based on assets under management so, as you can imagine, you get more fees the more assets you manage. One issue is: do you just grow for the sake of growing?”

External Management

Externally managed companies make more sense for smaller REITs because the costs of staff fall to the manager, rather than the REIT, the firm’s executives said. “If we were internally managed, the REIT would pay the management salaries as opposed to fees and likely wouldn’t be able to cover those for some time and would make it difficult for the staff to grow,” Stein said in an email.

Commencement Capital executives said that NY Residential REIT is the first of many location-specific companies it will launch through the new SEC investment rules. They’re also considering a Miami-based hospitality REIT, and another focused on Washington, D.C., residential property.

NY Residential REIT’s blank slate for property is an added benefit in that the company isn’t saddled by older assets in weaker markets that sometimes drag on the performance of larger landlords created through mergers, said Morris, formerly a managing director at brokerage Jones Lang LaSalle Inc. and the mid-Atlantic director of acquisitions for Boston Properties Inc.

Morris and Stein say that investors have no surprises about where the company will place its focus.